They tuk ur tax revenue

Last week the AFR ran several pieces talking about so-called profit shifting and base erosion – basically that large multinational corporations like Apple, Google, Microsoft, Starbucks etc. don’t pay their “fair share” of tax. This morning I have an op-ed in the AFR responding to those stories (ungated version here). Cats would recognise the arguments – I’ve been making them here for some time.

Since the G20 finance meeting there has been a lot of chest beating and bleating about multinational corporations not paying much tax in Australia. Joe Hockey even threatened to create a tax hurdle when deciding on foreign investment. The phrasing of that hurdle would have to go something like, “Do you commit to paying more tax than the law of the land actually requires?”

So there are two things going on:

Tax laws are written that allow firms to deduct legitimate expenditure incurred in the production of taxable income. Tax treaties are written so that firms and individuals don’t face double taxation on the same economic activity, and so on. These laws are written by governments, enforced by government officials, and disputes adjudicated by judges. In short, the odds are stacked against the taxpayer.

So that’s the tax system.

Some nations have realised that they can generate more revenue if they protect intellectual property than if they try to tax it at exorbitant rates. Those that haven’t bleat about base erosion. A question for the Australian government is why don’t multinational corporations like Apple and Google and Microsoft and Starbucks feel comfortable enough to locate their intellectual property in Australia? The answer to that question is both damning and embarrassing.

That’s the issue for Joe Hockey. Countries like Ireland and Singapore are eating your lunch. So you going to cry about it, or get off your bum and compete for the business like they have? In the meantime:

The real problem isn’t that some firms don’t pay enough tax; rather that governments have been routinely and systematically living beyond their means. There is no evidence to support the notion that the corporate income tax base is being eroded. What is happening, however, is that the corporate tax isn’t raising as much money as the government would like.

Ireland is not eating any lunch, at least not when it comes to Apple, they effectively aren’t paying tax anywhere and it is not about where to locate IP but simply finding the lowest tax rates preferably with some extra loopholes.

since capital is mobile, it will flow to investments that produce the highest after-tax returns. The corporate income tax raises the cost of capital and reduces after-tax returns in the corporate sector, and thus leads to a migration of capital into noncorporate or taxexempt sectors of the economy.

This migration has two effects: it lowers the supply of capital available to corporations, and it causes a reduction in rates of return in the noncorporate sector as capital becomes more plentiful there. The ultimate effect, therefore, is to lower returns for all owners of capital across the economy.

One important result of this capital migration is that the burden of the corporate income tax, over time, shifts to workers: with a smaller capital stock to employ, workers are less productive and earn lower real wages.

in small open economies, workers pay most of the company tax through lower wages.

after-tax return must be equal across countries. before-tax profits must go up and wages go down to equalise returns in the higher tax countries

“….governments have been routinely and systematically living beyond their means….” – quite true, and Apple, Google, Microsoft, Starbucks etc. have doubtless done quite nicely out of all of those deficit-funded dollars, pounds, Euro, yen etc. in the pockets of consumers.

Singapore might be explained on cultural/historical/political grounds, but Ireland – western, (now relatively) liberal, truly democratic – surely illustrates the slightly uncomfortable point that while there is always a case for looking hard at what governments do with public funds, with the added spur of international competition, we (open western nations) can’t all game the system in the way that small/micro-states do.

There is arguably a moral obligation to pay your ‘fair’ share but in the real world the Packer doctrine is the only one deserving consideration. Your fair share is no more and no less than your legal obligation.

You say its “famed” and yet you don’t know what its actually called or, apparently, what it actually is….

[I don’t want to be horrible here but someone who has started off as rude and aggressive as your good self shouldn’t type their email address in the field “Name”. Luckily for you I have edited this post so that you don’t broadcast your email address to the whole world. No. No. It’s quite alright. No need to thank me. Sinc]

You say its “famed” and yet you don’t know what its actually called or, apparently, what it actually is….

Michael – do you really want to get into a pissing contest? So I made a typing error. You knew what I meant, and so does everyone else. If you had followed the link you’d see that I have discussed this before in gory detail.

Sinclair – its a tax avoidance scheme. Companies with a half trillion dollar market cap and 170 billion in revenues don’t need the Irish to protect their IP – just ask Samsung. The issue of tax avoidance is a moral one – I’d say the beer whisperer sums it up pretty well.

Apologies for my rudeness and aggression and no, I don’t want to get into a “pissing contest”. Thank you for removing the email address, I blame Apple auto fill.

Well that is how it is described by many. As you pointed out. By contrast I argue its a return to IP. If you examine the double Irish Dutch sandwich structures you see it is driven by the location of IP. The so-called tax minimisation scheme is inherent in each countries definition of source and inherent in each countries voluntarily signed double taxation agreements.

Income earned by foreigners that isn’t sourced in Australia isn’t taxed in Australia. It is taxed somewhere else. Not only is this the law of the land, it is a sensible law too. Randomly taxing foreigners on their foreign income would be a strange thing to do.

Income earned by foreigners that isn’t sourced in Australia isn’t taxed in Australia. It is taxed somewhere else. Not only is this the law of the land, it is a sensible law too. Randomly taxing foreigners on their foreign income would be a strange thing to do.

In a strong field, perhaps the most stupid thing you have ever written (aggressive, to be sure). For the avoidance of doubt, the “income earned by foreigners that isn’t sourced in Australia” isn’t sourced in Australia in this case because, its a tax avoidance scheme. “Randomly taxing foreigners on their foreign income” based on their local sales is not strange at all.

No Michael – if you are not liable for any tax under Australian tax law, you can hardly be avoiding it. As I indicated in the article, the Australian government writes the law, Australian government employees administer the law, and judges – appointed by the Australian government and paid out of Australian tax revenue (okay I didn’t include those pieces of important information) – adjudicate disputes and enforce the law.

Now if you want to make a moral argument that’s fine – but which morality are you suggesting? If you want to argue that large multinationals should give money to governments that can’t organise themselves sufficiently to tax MNCs well that’s fine, but is it moral?

Now if you want to make a moral argument that’s fine – but which morality are you suggesting? If you want to argue that large multinationals should give money to governments that can’t organise themselves sufficiently to tax MNCs well that’s fine, but is it moral?

Yes – that’s fine. But make the argument? What is the moral principle at stake here? It’s just as easy for me to argue that 1. stealing is immoral, 2. all tax is theft, therefore paying any tax is immoral. Not very convincing, but it is an argument. Michael hasn’t even done that.

This has become almost an ethical question. These big firms are trying to pay as less taxes as possible. They are always searching for new ways and constructions to do this and searching for the borders of what is possible.

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Liberty Quote

I strongly feel that the chief task of the economic theorist or political philosopher should be to operate on public opinion to make politically possible what today may be politically impossible.